Festive seasons bring a lot of joy and cheer, but that’s not all about them. They also bring multiple opportunities for consumer brands to make profits. The demand for products increases multifold during important festivals in India like Diwali, Navratri, Holi and more. Manufacturers need to produce goods at a rapid pace to meet this increasing demand. They have to be equipped to meet the increased orders from customers. What makes them well-equipped to face the festive season with confidence? Working capital, of course! What is this all about, and how does it play a vital role for businesses to increase their revenues during the festive season? Let’s see below.
Working capital is a true representation of a company’s liquidity. It is a numerical value that explains if the company is financially healthy enough to meet the surging orders during the festive seasons and other times. The term, working capital, which is used often, actually refers to the net working capital of a business. It is calculated by subtracting the current liabilities from the current assets of a company.
The current assets include cash in hand, accounts receivables and the inventory of a business. The current liabilities, on the other hand, include the accounts payables and short-term debts. At any point in time, the net working capital (difference between these two) should be positive. This means that the business is well-equipped to generate quick cash to meet the increased demands of customers.
The financial health of a business can also be measured using another metric – gross working capital. This term includes only the current assets of a business, which can be liquidated into cash within a year. The most common examples of current assets are cash in hand, cash in the bank, accounts receivable, inventory in the business, investments if any (only the short-term ones) and securities that can be exchanged in the market. Gross working capital is as important as net working capital when it comes to meeting the increased demands of their products during the festive seasons.
It is a prudent idea for businesses to maintain a steady supply of permanent working capital at all times. Permanent working capital is a part of current assets, and it is exclusively used for managing the routine affairs of a business.
Importance of Working Capital for Businesses
Working capital is considered the lifeline or the backbone of any business because it reflects the liquidity of a business. Why is this an important measure for fulfilling seasonal demands successfully? It is because it helps the business in the following ways:
Procuring raw materials
A business has to anticipate an increase in demand for its product during festive seasons months in advance and plan for production accordingly. The first step towards this is to procure the required raw materials from suppliers to start the production of goods. When a business has enough liquidity, it can source all the raw materials without any financial difficulties. When a company doesn’t have enough current assets, its financial health will not permit it to source the raw materials to meet the increased festive demand. As a result, it would have to resort to exorbitant debts from money lenders to meet last-minute demands, thereby putting itself in dire straits. Money lenders and unstructured sources of working capital can do more harm than good for any business.
Inventory Management
With more and more people resorting to online purchases these days, consumer brands need to have the right stock of products on their shelves to cater to the last-minute demands of these shoppers. Today, many people shop for their Diwali clothes from sites like Amazon and Flipkart, just 2 or 3 days before the festival, as they know pretty well that their products will be delivered within a day. A well-managed working capital is very important for a business to meet such unpredictable orders at the last minute. Not managing inventory properly can lead to stock-out issues for a business. As a result, a customer may have to buy his/her product from a competitor brand. A revenue-generating opportunity lost there, isn’t it?
Meeting routine expenses
Increased raw materials and increased stock mean more production during festive times. A significant increase in production requires the employment of more people, using additional resources like electricity, paying more wages to the staff for working overtime to meet the seasonal demands and more. Any consumer brand would agree that its operational expenses and overhead charges increase multifold during the 3 to 4 months of the festive season. A healthy working capital helps businesses to combat these increased operational expenses with ease.
Catering to unpredictable sales during festivals
Businesses mostly plan for their seasonal demands after analyzing last year’s pattern of increased orders. However, a lot of factors ensure that the current year may not follow the same pattern as the previous year. These factors include the penetration of online sites in rural areas, changing lifestyles of people, people embracing different cultures and customs of other communities as well and more. All of these can offshoot the festive demand forecasts of businesses by a large margin. This is where the financial health of a business comes to its rescue, and prepares it to meet the unpredictable seasonable demands. Working capital is nothing but a direct measure of this financial health.
Most small and medium-scale enterprises depend on the festive season to increase their revenues. This is because at least 30 to 40% of their annual sales are from this season. Due to their lack of credit history, size of business and other factors, they may not be able to approach banks and financial institutions for loans to improve their working capital. This is where fintech companies like Finverv become one of the important sources of working capital for these businesses.
Also, there are many such fintech companies that offer services like invoice factoring, where they provide money to a business in exchange for its accounts receivables. This way, a business can exchange its outstanding invoices for immediate cash, thereby increasing its working capital in an instant.
It is a good idea for businesses to focus on various sources of working capital and their potential to generate increased revenues and the reputation of their brands during the festive seasons, especially. With the advent of technology and the internet, even SMEs can embrace modern Fintech systems to manage their working capital better than before. These systems help businesses to automatically track cash flows, check the liquidity, forecast demand forecasts, plan for seasonal fluctuations and use online platforms to source raw materials and manage inventory properly.
